Jobs data omen of uncertain times

Let’s be conservative and use the smoothed trend numbers. By that measure the unemployment rate in March was 5.5 per cent, its highest level since 2009.

Under-employment is 20 per cent above its pre-financial crisis level. Employment is growing at an annual rate of just over 1 per cent, or about half its post-1999 average.

That’s a significant deterioration on the headline-catching, seasonally adjusted numbers of the February labour force survey, but it is more in line with the Reserve Bank’s forecast for the economy this year and more consistent with the economy we see when we look out the window.

The big swings in the data for seasonally adjusted estimates of employment in February and March now look like mostly statistical noise.

On the strength of the recent trend data, the unemployment rate should reach 5.7 per cent by December.

So, what are the chances of another cut in the official cash rate this year? After the rebound in retail sales I’d say less than 50 per cent, but still high.

The economy is going through a bumpy transition from a mining investment boom to growth powered by a combination of exports, a housing construction recovery and non-mining business investment.

We cannot be sure about how strongly the economy will grow in the coming quarters. And, as the unpleasant surprise of the December quarter national accounts should have reminded us, we are not even sure how weak it was before the recovery started.

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It’s too late for monetary policy to do much about unemployment in 2013. But it is not too late to act if 2014 looks at risk of being weak.

Of course, the economy could do better or worse than 5.7 per cent unemployment by the end of the year, depending on Europe and global confidence, the exchange rate, mining investment, the willingness of state governments to increase the supply of land for dwellings, and so on.

Some of these variables are very difficult to predict. Even the coming peak of the mining investment boom is shrouded in uncertainty, as the Reserve Bank’s head of economic research and analysis,
Christopher Kent
, explained to a Bloomberg economic summit on Wednesday.

While there is still the prospect of sizeable new projects, he says, the profile of mining investment in the near future is likely to depend more on the rate of progress on existing projects and any further cost overruns.

“For some investment projects, most notably in the liquified natural gas sector, there have already been delays associated with logistical problems affecting a number of the very large, complex undertakings," Kent told the conference.

“Any further delays will reduce investment now but add to it later on. Also, cost overruns, to the extent that they reflect the need for more work than was originally planned, represent extra investment.

“This is not great from the viewpoint of shareholders in resources companies, but it is investment activity nonetheless."

Kent points out that there is still a lot of work in the pipeline, including some large LNG projects, but also conflicting evidence on the question of how much will be done.

“The latest capital expenditure survey by the Australian Bureau of Statistics," he says, “suggests that mining investment could actually rise from this financial year to the next.

“While this is more optimistic than the outlook implied by companies’ public statements and our own liaison, it highlights the fact that the outlook for mining investment remains uncertain."

How that all plays out and interacts with household spending and non-mining business investment will affect economic growth, unemployment and interest rates.

It also will affect the distribution of growth between regions.

That’s another important piece of information contained in the labour force numbers. They tell us a good deal about how the states are faring.

Unlike retail sales and construction data, the monthly labour force data cover all economic activity. They therefore provide the most regular comprehensive snapshot of the national and state economies.

The second graph shows the annual growth rate of hours worked by state. Obviously hours worked are a biased indicator of economic activity because labour-intensive production is given more weight than capital-intensive production.

Nevertheless, the data clearly show the deceleration in the demand for labour in Western Australia as the growth of both private and public investment began to slow in the second half of last year. This is the beginning of the end of the mining investment boom.

The hours worked data also pick up the revival of growth in NSW, which now has the fastest annual rate of labour demand growth of all the states.

NSW has a fat pipeline of road and rail infrastructure projects, and labour demand in the second half of last year seems to have been supported by a surge in public infrastructure investment. But the state economy also will get a big boost from the recovery in housing construction, mainly because the level of housing construction has been so low.

Victoria clearly is at a very different point in its economic cycle, with its housing market over-built and its manufacturing sector badly affected by the strength of the Australian dollar against the currencies of the developed and developing world in general and the yen in particular.

The graph also shows the recovery under way in Queensland, and it gives us a clue about why Labor looks like it could be in trouble in South Australia and Tasmania.